It’s employment Jim, but not as we know it

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Unemployment is at its lowest since the early 1970s. And yet, the economy is performing no better than it did in the early 1980s when the unemployment rate was 12 percent. Crucially, despite the number of jobs created and the number of unfilled vacancies increasing, wages have actually fallen slightly in the last quarter; and have been stagnant for the decade since the 2008 crash.

This mismatch between wages and employment has been termed “the productivity puzzle.” According to mainstream economics, rising employment should automatically push wages higher. Since higher wages mean more disposable income, consumers should be more inclined to spend and to borrow against big ticket items like houses, cars, home improvements and holidays. Not only has this not happened, but consumers as a whole have been cutting back on borrowing and spending; bringing a retail apocalypse that began in the USA onto Britain’s High Streets.

Economists and economic journalists have been left scrambling around for an explanation for why low unemployment refuses to obey the laws of economics. BBC economics editor Kamal Ahmed, for example, asks:

“Why aren’t wages rising more quickly?

“There could be many reasons.

“Since the financial crisis, lack of investment in new machinery and technology to help firms perform better punched a hole in economic performance. The public sector pay freeze followed by the 1% pay cap has also weighed on the overall numbers.

“Some economists also argue that a lack of bargaining power – union membership has been in long term decline – is leading to fewer widespread agreements on earnings increases.”

“OK, here’s my theory about the brontosaurus, I mean, about wages. What employers learned during the long slump is that you can’t cut wages even when people are desperate for jobs; they also learned that extended periods in which you would cut wages if you could are a lot more likely than they used to believe. This makes them reluctant to grant wage increases even in good times, because they know they’ll be stuck with those wages if the economy turns bad again.”

Might there be a simpler explanation for why wages are not increasing? A starting point to this is to take a leaf out of Karl Popper’s approach to the scientific method and the notion of falsifiability. Which is a long-winded way of saying that, if the economists’ model consistently fails to predict the real world; maybe the model is wrong.

The economic models used by economists and politicians were devised during the unprecedented economic upswing that occurred in the two decades 1953-73. This was a period in which energy consumption, resource extraction, manufacturing output and trading activity rose exponentially. There was more economic and trade activity in those 20 years than in the 150 years that preceded them. It was a period that saw growth rates of 7 percent or more, and interest rates climbing into double-digits.

It was during this period that the notion of a “career” – working roughly 40 hours per week for a single employer on a permanent contract – became the accepted norm. The expectation being that an employee would enter the workforce in a relatively low position and then work their way up the internal career ladder of the same organisation. It was also during this period that workers’ share of profits rose for the only time in recorded history – that is, wages went up as prices fell; ushering in the age of mass consumption.

Historically, however, employment has been far more precarious. Go back to the depression of the 1930s or the sluggish economy of the 1890s, and we find work patterns akin to the part-time, zero-hours and gig working that is becoming increasingly common in the modern economy. Not, of course, that the nature of employment itself hasn’t changed. In those days, economies were localised, with far more people employed in primary industries like mining and steel working. Today, most of the primary industry has gone and manufacturing is a much smaller part of the labour market, while most people now work in the service sector; in particular “human health and social work.”

Put simply, the great wealth-creating forms of employment that generated the post-war boom and the wage growth that accompanied it, are no longer present in the declining western economies. In our highly globalised economy, wage growth has followed those industries east to developing economies like China and India. Workers in those economies have enjoyed massive wage gains even as the living standards of western workers have collapsed.

It is not, however, those industries in and of themselves, that drive up wages. Nineteenth century British industry grew at a sluggish pace in comparison to the years after the Second World War. As a result, there were fewer wage gains to be made; and those that were, were often bitterly fought over.

Why should it be that the period after World War Two was so different to the period prior to World War One? In a word: energy.

Most economists take the view that energy is peripheral to the generation of wealth. Indeed, most economic models ignore energy as (like the pollution it generates) an “externality.” Wealth, they argue, is the product of the trading interactions between households and businesses. Like so much else in economics, this is nonsense. Far from being peripheral to the creation of wealth, energy is the only thing that does create wealth. As contrarian economist Steve Keen puts it: “capital without energy is a statue; labour without energy is a corpse.”

The coal-powered industrial revolution that propelled Britain to greatness in the nineteenth century was truly revolutionary by the standards of the 100 percent renewables economy that it replaced. However, it faced two hard limits: the energy density of coal (around 30 mega joules per kilogram) and the technological limits to transforming that energy into useful work. Coal could not drive machinery directly, but had to be used to boil water to generate the steam that drove the machinery (something that we still do in electricity power stations today).

When the American armies landed on the beaches of Normandy in June 1944, every one of their divisions was motorised. Against them was a German army, 90 percent of which still depended on horses. More than any factor, oil – and the industrial power that oil enabled – decided the outcome of the Second World War. In its aftermath, once the business of reconstruction and realigning industry from military to civilian production was complete, first Western Europe and Japan, and later the whole world, switched to oil as the “master energy source.” Oil had two massive advantages over coal. First, the diesel oil used in heavy industry and transportation has an energy density of 48 mega joules per kilogram. Second, via the internal combustion engine, that energy could be put to use directly.

The difference between coal and oil – and the technologies used to harness them – is the difference between the sluggish growth rates of the nineteenth and twenty-first centuries and the growth on steroids recorded in the twenty years 1953-73.

The labour market conditions currently being experienced across the developed world are the product and symptom of one key factor: energy consumption per capita has been falling since 1973. Through the use of massive quantities of debt, the developed states were able to use their control of the global financial system (especially the US dollar’s reserve currency status) to, in effect, extract wealth from the developing states to maintain some of the high living standards achieved in the post-war years.

The crisis of 2008 exposed much of that financial deceit – although central banks have maintained much of it by taking bad debt onto their own balance sheets. However, many of the trends away from high-skilled/high-paid (i.e. high-energy) employment were already in place long before the banking bubble burst. Rather than being a product of the 2008 crisis, the labour market trends that are blamed for causing low wages – part-time, zero-hours and gig working in low-profit, labour-intensive services – are actually another aspect of the same crisis. The 2008 crash merely made these trends more visible to those within the relatively protected affluent class where most mainstream journalists live.

We should be alarmed about these labour market trends. According to the UK Office for National Statistics, just 7.5 percent (59,000) of vacancies are in manufacturing. The remainder (727,000) are in services:

“A breakdown of the services sector shows that the vacancy rate in that sector is driven by four sub-sectors. The four sub-sectors of the services sector with the largest number of vacancies are Wholesale and retail trade sub-sector (133,000), the Human health and social work sub-sector (130,000), the Accommodation and food service sub-sector (90,000) and the Professional scientific and technical activities sub-sector (74,000). The differences in vacancy rates across sectors is an indication of the relative sizes of the sectors, and may be indicating that labour market tightening is not felt in the same way across the different sectors.”

Another ONS commentary suggests that one reason for the high vacancy rate in services is simply that the jobs have been created in different regions to the unemployed/under-employed population. That is, relatively low paid and only nominally full-time (more than 18 hours) jobs created in prosperous parts of London and the Southeast can offer little to unemployed people in Sunderland or Blaenau Gwent. Even well-paid graduates in professional positions in London struggle to find affordable accommodation in the London area. Low-paid service workers have to do three or four jobs just to afford a room in a shared house.

More worrying for our economic future is the section of the population responsible for the latest fall in unemployment:

“In the three months to April 2018, employment increased among all age groups except for those aged 25 to 34 years when compared with the previous quarter. The increase in overall employment was mainly driven by the increase in employment among those aged 50 to 64 years, whose numbers increased by 86,000 when compared with the November to January 2018 period.”

In an earlier age, the government cynically used “incapacity” as a means of excluding this group from the workforce while keeping them out of the unemployment statistics. They were able to do this because of the tax receipts they enjoyed from North Sea oil and gas exports. Today, the over 50s are obliged to compete for work alongside everyone else; and are now clearly blocking younger workers from progression into work. More worryingly, however, the figures indicate that this generation is far less well off than the baby-boomers who are now edging into retirement. Where a large part of the baby boom generation were able to taper their employment in the run up to retirement – using savings and pensions to cut their work hours or even retire early – this next generation is much poorer and will have to work much longer; something that government is forcing by raising the retirement age from 65 to 68 (at least).

In effect, as the energy available to the economy continues to fall – and, indeed, as more of the energy available to us has to be put toward securing energy for the future – the nature of work is shifting back to patterns akin to the nineteenth century; in which all but a shrinking affluent minority must do more work in exchange for a lower standard of living. As this trend becomes more obvious then, one way or another, the global debt-based monetary system that created the 2008 crash is going to go away; after which, people in the developed economies face severe declines in their living standards.

There is, of course, a vociferous and heated political debate to be had as to how this burden is to be shared. Nevertheless, in the absence of an alternative energy-dense and technologically useable fuel source (i.e. not solar panels, wind turbines of tidal barrages, quaint as those are) the kind of employment and living standards that our parents enjoyed in the economic anomaly of the post-war years will fade into the history books. In future we can expect much more manual work; a lot of it in obtaining energy and resources – including the food required to maintain more than 7.5bn humans – just to keep us alive. As Spock from the original Star Trek series might have put it: “it’s life Jim, but not as we know it.”

As you made it to the end…

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